Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Uh oh. Michael Kitces says that you are wrong on the SWR.
We need you to correct your mistake by close of business today and end your campaign of fraud.
Michael and I have had numerous conversations about safe withdrawal rates, as you know. I think that Michael is right about a lot of things. I also think that he is very, very wrong about one point. Those interested in knowing more about those conversations can check out the blog entries filed under the “Michael Kitces and SWRs” category.
I like what the article says about the SWR being a highly conservative number. It is that. An argument can be made that it is too conservative. One of the things that I did with the Retirement Risk Evaluator is to permit aspiring retirees to check out how much they can change the withdrawal rate by permitting a bit more risk. The calculator defines a withdrawal rate with a 95 percent chance of working out (presuming that stocks perform in the future somewhat as they always have in the past) as “safe.” What if the aspiring retiree is okay with using a number that has only an 80 percent chance of working out? The calculator provides that number. There’s nothing wrong with choosing only 80 percent safety. The level of safety is a judgment call for the retiree to make. So I think it is a good idea to supply that number. Having a 95 percent chance of things working out is super safe. But having an 80 percent chance is still reasonably safe. I think that moving away from the one-size-fits-all approach is a good idea.
That’s different, of course, from outright lying about what is safe. Greaney claimed that the 4 percent withdrawal was “100 percent safe” even when the CAPE level was 44 and the last 38 years of peer-reviewed research shows that a withdrawal rate of 4 percent had only a 30 percent chance of working out. Going with a retirement that has only a 30 percent chance of working out is insanely reckless behavior. Aspiring retirees need to know that. And of course Greaney made it 10,000 times worse when he responded to questioning of the methodology used in his study with death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. Financial fraud is a felony in the United States. Not good.
Michael does not speak clearly on whether he believes that that sort of behavior is fraud. He doesn’t engage in it himself. That indicates that he does not approve of it. But he holds back from personally condemning it. He should personally condemn it. When we permit that sort of behavior, we hurt people. We hurt both the retirees whose lives are destroyed and also the con men putting forward the death threats. Greaney wouldn’t be looking at a prison sentence today if Motley Fool just gave him the boot back in June of 2002, when I implored them to. By failing to act, Motley Fool made the situation worse. Michael has done the same. I am proud to say that I spoke up.
I agree with another point made in the article. Retirees should certainly feel free to take a higher withdrawal rate in cases where they have other sources of income. That one is obvious. I don’t see how anyone could disagree with that. But the point being made is valid. There are some people who would feel funny about not taking the precise withdrawal rate being generated by a calculator even when that is justified by factors not considered by the calculator’s methodology. People making calculators should always specify the circumstances in which other numbers make better sense.
That’s actually one of the big problems with the 4 percent number. Valuations aren’t even considered in the calculation of that number. People using calculators that generate that number in all circumstances should be warned that the calculators do not take into consideration the effect of valuations and thus cannot work in worlds (such as ours!) in which the valuation level that applies on the day the retirement begins affect the result. There is no one withdrawal rate that works in all circumstances. I have been saying that since the morning of May 13, 2002, and now this article points out that Michael Kitces believes this as well. Good for Michael.
I don’t like the reference in the article to how the 4 percent rule is based on what happened following the Great Crash of 1929 and the Great Depression. It is of course true that the 4 percent number was based on a worst-case result scenario and that makes it sound very safe. But the returns sequence that we saw in the 30-year time-period from 1929 fortunate was actually on the lucky side. It was the valuation level that applied in 1929 that was insanely risky.
The reality is that a 4 percent withdrawal had only a 50 percent chance of working out for those who employed it at the time. We can look back now and say that it succeeded. But no one who understands the message of the past 38 years of peer-reviewed research in this field would say that it was safe. A 4 percent withdrawal at that time was a high-risk bet that happened to work out.
Just barely, by the way. Retirees who took a 4 percent withdrawal in a retirement that began in 1929 ended up with $1 remaining in their portfolio in 1959. Good retirement planning would not be telling people to use a withdrawal rate with only a 50 percent chance of working out and leaving only $1 in the portfolio at the end of 30 years. That’s very scary stuff.
And of course the valuation level was a lot higher in 2000 than it was in 1929. The 2000 retiree who took a 4 percent withdrawal had only a 30 percent chance of seeing his retirement plan succeed for 30 years. Not safe. Not a close call. Not at all good. I favor a policy of reporting the numbers accurately and honestly. Sometime the safe withdrawal rate is a number larger than 4 percent. We should tell people that. Sometimes the safe withdrawal rate is a number smaller than 4 percent. We should tell people that too.
I naturally wish you all the best that this life has to offer a person, Anonymous.
Honest Safe-Withdrawal-Rate Reporter Rob
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